The electricity sector is changing. New technologies are being integrated into the grid and installed behind customer meters, including a range of smart grid technologies, distributed generation, demand response, and energy efficiency. These same technologies are putting pressure on the traditional utility business model, which is focused on providing a regulated rate of return on capital investment. As a result, both utilities and regulators are looking for ways to modernize the regulatory framework to better align utility financial incentives with the changes taking place on the grid and with public policy goals. One way to do that is performance-based regulation (PBR). A new paper from AEE Institute explores the potential for Pennsylvania to benefit from PBR to deliver better service (and more options) for customers and greater economic development for the state.

PBR is a regulatory framework that attempts to align the behavior and financial interests of regulated utilities with public interest objectives and consumer benefits. It does so by rewarding utilities for achieving well-defined performance metrics (outputs), as opposed to providing incentives related primarily to capital investment (inputs).

Interest in PBR in Pennsylvania followed from a 21st Century Electricity System CEO Forum held a year ago. The main objective of the day, which brought together CEOs and senior executives from advanced energy companies, the state’s electric and natural gas utilities, and key policymakers and regulators, was to establish a common vision of the 21st century electricity system in Pennsylvania that increases consumer control over energy options, increases system reliability, reduces future energy costs relative to business as usual, and transforms the power sector into one that embraces advanced energy technologies. One recommendation of the Forum was to further explore PBR and what it could offer Pennsylvania.

Performance-Based Regulation for Pennsylvania: An Opportunity for Pennsylvania to Drive Innovation in the Utility Sector summarizes the collective thinking of a Working Group, facilitated by AEE Institute, that met over several months to develop recommendations regarding the potential for PBR in Pennsylvania. The Working Group included representatives of BRIDGE Energy Group, CLEAResult, Enbala, EnergySavvy, EnerNOC, Johnson Controls, Intel, Keystone Energy Efficiency Alliance, Navigant, Nexant, Oracle, Philadelphia Gas Works, Philips, Recurrent Energy, Schneider Electric, Siemens, SmartWatt, Smart Wires, Spirae, SunPower, and Sunverge. The whitepaper was also endorsed by several other AEE members: EnergyHub, FirstFuel Software, Lime Energy, and Resource Innovations.

In addition to outlining a general PBR framework, the paper identified four specific categories of performance to explore further in the Pennsylvania context: customer empowerment, operational efficiency and reliability, environmental sustainability, and market innovation. Each category seeks to address important benefits, many of which are not valued in the current regulatory structure. Within these performance categories, the Working Group identified a wide variety of potential performance metrics, and prioritized six metrics that could be implemented quickly and which deliver on multiple performance categories:

The paper also suggested an open and transparent process for the setting of performance targets and the associated incentive levels.

In considering the potential for PBR in Pennsylvania, the Working Group found that the Public Utility Commission already has the authority in statute to consider PBR. In addition, on March 2, 2017, the PUC issued an order on Alternative Ratemaking, seeking input from interested parties on a range of issues, including PBR. This process has already begun, with initial comments to be filed by May 31 and reply comments due July 31.

Performance-Based Regulation for Pennsylvania is meant to serve as a starting point for discussions with regulators, policymakers, utilities, advanced energy companies, and others. In the view of the Working Group facilitated by AEE Institute, Pennsylvania has a unique opportunity to modernize its regulatory framework to facilitate industry evolution and the deployment of advanced technology solutions, creating economic opportunity for the state. The building blocks are in place to put Pennsylvania at the forefront of developing a 21st century electricity system.